Current account deficit during Q3 highest since 1990.
For the first time in over a decade, India reported a capital account deficit during the third quarter of the current financial year mainly due to net outflow under portfolio investment, banking capital and short-term trade credit. The capital account balance remained in the surplus zone since the second quarter of 1998-99.
In addition, the current account deficit widened to $14.6 billion during the third quarter of the current financial year, as against $4.5 billion during the corresponding period last year. This is the highest quarterly deficit since 1990.
The adverse impact of the global meltdown was responsible for the grim situation.
According to the balance of payments (BoP) data released by the Reserve Bank of India (RBI) today, during October-December, the first quarter after the global credit crisis intensified in September, the capital account balance saw an outflow of $3.23 billion, as against an inflow of $31.27 billion during the third quarter of last year.
While almost all sources of funds were under pressure, the biggest hit came by way of portfolio investment, which resulted in an outgo of $5.8 billion during October-December this year, as against $14.85 billion inflows during the corresponding period last year. Within this, while there were hardly any inflows by way of depository receipts, foreign institutional investors pulled out $5.8 billion during the third quarter of the current financial year, as against inflows of $8.9 billion.
Similarly, there was an outflow of banking capital of nearly $6 billion, as against inflows of $1.06 billion. Banking capital includes overseas fund raising by banks but excludes non-resident deposits.
Due to the global turmoil there was an impact on short-term trade credits, which saw an outgo of $3.14 billion during October-December this year as against $4.13 billion inflow last year as due to lower disbursements reflecting tightness in the overseas market and increased repayments as roll over was difficult.
In case of the other sources, inward foreign direct investment and external commercial borrowings fell due to the adverse effects of the meltdown.
The gross capital inflows to India during third quarter were estimated at $ 70.0 billion against an inflow of $127.3 billion in the corresponding quarter of 2007-08. During the quarter capital outflows stood at $ 73.6 billion.
The current account deficit widened mainly due to large trade deficit and moderate increase in net invisibles. Even private transfers, largely consisting of inward remittances from Indian workers abroad for family maintenance dropped by 4.6 per cent to $10.36 billion during the third quarter this year, as against $10.86 billion during the corresponding period last year.
The other items which are part of private transfers includes local withdrawal from non-resident rupee deposits, gold and silver brought through passenger baggage, and personal gifts, donations to charitable, religious institutions.
| ALL ROUND PRESSURE India's Balance of Payments ($ billion) | |||
| September-December | |||
| 2007-08(PR) | 2008-09(P) | % change | |
| Exports | 40.98 | 36.70 | -10.46 |
| Imports | 67.03 | 73.02 | 8.91 |
| Trade deficit | 26.05 | 36.30 | NA |
| Invisibles (net) | 21.52 | 21.66 | 0.66 |
| Current account balance | 4.53 | 14.64 | NA |
| Capital Account* | 31.26 | -3.24 | NA |
| Change in Reserves# | -26.73 | 17.88 | NA |
| (-Indicated increase, +indicates decrease- only for change in reserve) , *: Including errors and omissions, #:On BoP basis excluding valuation. P:Preliminay PR: Partially Revised | |||
The global economic slowdown took a toll on the export growth and it declined by 10 per cent against an increase of 33 per cent a year ago. At the same time, import growth slowed to single digit after six years to nine per cent. As a result, trade deficit widened to $39.4 billion during the quarter, as against $ 26.05 billion during October-December 2007.
The slowdown also took a toll on services exports, which recorded a 0.50 per cent increase to $12.80 billion during the third quarter of the current financial year, as against $12.02 billion in the corresponding period last year. Software exports, however, provided a silver lining of sorts, rising 16.08 per cent to $10.16 billion.
